The taxpayer in the case of Palsgaard and Kelley v. Commissioner, TC Memo 2018-82 argued that his social security disability insurance (SSDI) benefits should not taxable under IRC §104. But the Tax Court did not agree with the taxpayer.
The opinion noted that the taxpayer had been disabled by a physical injury:
Petitioner had a successful medical practice in California until March 2009, when she suffered a physical injury that left her disabled within the meaning of section 72(m)(7). This injury resulted in a long-lasting physical impairment of indefinite [*3] duration that substantially interfered with her ability to engage in gainful employment. She retired from the practice of medicine shortly thereafter.
Initially she received payments under a disability policy from an insurance company, but the insurance carrier ceased making such payments. The taxpayer sued the insurance company and received a payment in a final settlement in 2013.
But having had her regular insurance benefits cut off, the taxpayer filed for SSDI benefits. As the opinion continues:
While her litigation against LINA was pending, petitioner applied to the Social Security Administration (SSA) for benefits under the Social Security Disability Insurance (SSDI) program. Unlike Supplemental Security Income benefits, which are based on need, SSDI benefits are generally based on work history and the amount of the beneficiary's prior contributions. See 42 U.S.C. secs. 402, 423(c)(1) (2012); 20 C.F.R. sec. 404.130 (2017). The SSA determined that petitioner was disabled and that she was entitled to SSDI benefits. Petitioner received SSDI benefits of $30,274 during 2013.
While Section 86 generally requires taxpayers with sufficient income to report a portion of social security benefits as includable in gross income, the taxpayer noted that she was not receiving tradition retirement benefits, but rather SSDI payments.
However, the Tax Court pointed out that IRC §86 makes no such distinction for SSDI benefits, noting:
Gross income specifically “includes social security benefits,” in an amount determinable under a specified statutory formula. Sec. 86(a) and (b). Section 86(d)(1)(A) defines the term “social security benefit” to include “any amount received by the taxpayer by reason of entitlement to * * * a monthly benefit under title II of the Social Security Act.” SSDI benefits are paid monthly and have been paid under title II of the Social Security Act since 1956. See Social Security Amendments of 1956, Pub. L. No. 84-880, sec. 103(a), 70 Stat. at 815 (codified as amended at 42 U.S.C. sec. 423).
She then attempts to argue that, despite IRC §86’s inclusion, her case would be excluded under various portions of IRC §104(a). The Tax Court rejects that view, noting:
Petitioner argues that her SSDI benefits are excluded from gross income by section 104(a), which covers certain amounts payable on account of physical injuries or sickness. By enacting section 86, Congress stated its clear intent that all forms of Social Security benefits are taxable to the extent set forth in that provision. See, e.g., Thomas v. Commissioner, T.C. Memo. 2001-120, 81 T.C.M. (CCH) 1653, 1654. We have never recognized an exception to that rule, and we will not do so here.
Thus, the taxpayer is required to recognize the appropriate portion of her SSDI benefits as includable in gross income.